EQC reinsurance cover gets a boost

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The Earthquake Commission has substantially increased its reinsurance cover for the 2012-13 year, trebling the amount it paid before the Canterbury earthquakes so it has potential cover for a "$7 billion" Wellington quake.

EQC chief executive Ian Simpson says that in stumping up $130 million for the cover, the commission needed to be prepared for eventualities including a big quake in Wellington.

Before September 4, 2010, it was paying about $40m a year for reinsurance.

"The reinsurers have been telling us for a long time that insurance was had too cheap for too long in New Zealand," he said of the new environment set by the Canterbury earthquakes.

The commission's reinsurance cover was to provide balance to several disaster scenarios.

Modelling showed the country's "probable maximum loss", was "believe it or not" still Wellington at a mid-point of about $7b of damage.

"The trouble is, it's a mid-point so it's anywhere from roughly not big to roughly $12b or $15b." The probable maximum loss was insurance phraseology used to help decide how to balance EQC's insurance programme.

"When we say ‘probably' here, it's something like a 1-in-500- or 600-year event."

After trips to talk to reinsurers, EQC had settled on a larger reinsurance cover, Simpson said, partly because it made more sense financially. Before September 4, 2010, EQC paid for the first $1.5b for a natural disaster, with reinsurers extending the cover per event up to $4b.

Following negotiations with reinsurers, EQC or the taxpayer would pay the first $1.75b, extending under reinsurance to $5b per event, with the Crown guarantee coming in behind that.

That reinsurance cover would also "reinstate" once, in terms of a future aftershock after a big event during the reinsurance period from June 1, 2012, to May 31, 2013.

The total cost of insurance claims for the Canterbury earthquakes has officially been estimated at $30b, although others have put the figure higher, towards $40b.

The international reinsurance landscape had changed.

"A lot of the conversations early on in that (reinsurance) process were: ‘We'd love to keep insuring New Zealand, but can we carve out that bit that's gone off, is still shaking, that bit called Canterbury'."

It was now very important to retain the confidence of international insurance and reinsurance markets.

"It's easy to picture these international reinsurers as a group of anonymous paymasters who are dictating the terms . . . nothing could be further from the truth. They've been hugely supportive all the way through the process," he said.

Getting additional cover within the period of the main Canterbury earthquake period reflected the trust built up, Simpson said.

In the past couple of weeks, EQC had drawn down the "billionth dollar" from the reinsurers, with the total reinsurance claim for the Canterbury quakes to be around $5b.

In total, EQC would contribute about $11b of funds to the Canterbury rebuild - both from reinsurance coffers and its own fund. The Crown would add another $800m to $1b to that figure for a total of $12b.

International reinsurers were now seeking more information about risk in this country.

If EQC could tell them more about risk associated with land and property and their strengths or weaknesses, that would reduce costs for everyone.

‘What we've demonstrated in Canterbury is that we can publish maps to the nearest 10 metres, to show the land conditions for every single section across Canterbury."

Reinsurers had started increasing their charges after a damaging Chilean earthquake, followed by Christchurch's damaging February 22, 2011, earthquake, then the Japanese earthquake and tsunami soon afterwards.

But now, despite the United States-based Superstorm Sandy, the global situation had evened out, with reinsurers' balance sheets looking more healthy, meaning rates were likely to fall in the next year.